Annual Report
Corporate
Income
Fund
May 31, 1999
T. Rowe Price
Report Highlights
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Corporate Income Fund
o Bond markets were volatile during the 12 months ended May 31 as investors
favored Treasuries and high-grade corporate bonds in the first half, and
lower-quality bonds in the second half.
o The fund returned 0.53% for the half-year and -1.21% for the past 12
months, exceeding its benchmarks over the shorter term but trailing for the
year.
o Annual performance was constrained by exposure to securities that
suffered from the global turmoil in 1998.
o We added some defensive investment-grade bonds as well as high-yield
securities, which outperformed Treasuries in recent months.
o We believe the yield advantage of corporate bonds versus comparable
securities should continue to benefit investors.
Fellow Shareholders
The 12 months ended May 31 were a volatile period for corporate bond investors.
Following global turmoil in the summer of 1998, a flight to quality drove the
prices of high-grade bonds higher while lower-rated issues lagged. However, as
global markets stabilized in late 1998 and early 1999, investors changed course
and redirected their assets into higher-yielding securities. Your fund reflected
this environment with a return that surpassed Treasuries during the past six
months but trailed them over the fiscal year.
MARKET ENVIRONMENT
The U.S. economy continued on its path of high employment, strong economic
growth, and low inflation during the past 12 months. However, the growth
trajectory was not entirely smooth. Beginning in the summer of 1998,
threats to global economic expansion emerged as conditions deteriorated
rapidly in Asia, Russia, and Latin America. Japan's ongoing recession and
banking crisis continued to put downward pressure on the currencies of many
Asian countries. In August, Russia's devaluation and debt restructuring
contributed to widespread fears of contagion throughout the emerging market
bond sector. Ongoing weakness in international markets took a heavy toll on
the largest economies in Latin America, our major trading partner. These
events, as well as concerns about a possible recession in the domestic
manufacturing industry, prompted the Federal Reserve to lower the key fed
funds rate three-quarters of a percentage point in three separate moves
between September 29 and November 17.
Interest Rate Levels
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10-Year Treasury Note BBB-Rated Corporate Bonds
5/31/98 5.57 7.24
5.44 7.24
5.5 7.28
8/98 5.2 7.33
4.46 7.14
4.63 7.32
11/98 4.83 7.17
4.7 7.18
4.67 7.11
2/99 5.18 7.33
5.24 7.28
5.26 7.27
5/31/99 5.56 7.4
During the first half of the fund's fiscal year, single B and split-rated
(BBB/BB) corporate bonds significantly underperformed high-grade (AAA and
AA) corporate bonds. Yankee bonds (foreign securities denominated in U.S.
dollars), specifically those issued by companies with exposure to Latin
America and Asia, also lagged high-grade corporate bonds by a wide margin.
Total Return by Credit Quality
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Periods Ended 5/31/99
6-Month Return 12-Month Return
AAA/AA/A -1.66 3.47
BBB -0.24 2.96
BBB/BB 2.14 2.31
BB 1.96 5.02
B 1.41 -1.23
Following the rate cuts by the Fed, risk premiums on many corporate
bonds-the higher yields investors demand for assuming greater risk-began to
narrow, and lower-quality corporate securities, particularly single-B,
split-rated, and Yankee bonds, outperformed Treasury securities. The trend
continued into 1999 in response to stronger-than-anticipated U.S. economic
growth and signs of recovery in emerging markets. U.S. GDP grew at a robust
annual rate of 4.3% in the first quarter, and the price deflator (a measure
of inflation) rose 1.4%. These factors, coupled with stabilization abroad
and a dawning perception that inflation could once again become a problem,
contributed to the beginning of a trend toward higher Treasury yields. A
flattening in the yield curve also resulted as short-term rates rose even
more sharply than long-term rates. Between October 5, 1998, and the end of
May, the yield on the 30-year Treasury bond rose from 4.7% to 5.8%, while
the rate on the five-year note jumped from 4.0% to 5.6%.
As a result of these changing market conditions, split-rated corporate
bonds (BBB/BB) posted the best returns during the past six months, followed
by BB securities. Yankee bonds also outperformed high-grade bonds by a wide
margin. Results for the various credit ratings over both the 6- and
12-month periods are shown in the table on this page.
PERFORMANCE AND STRATEGY REVIEW
With this report, we are changing the benchmark from the Lehman Aggregate
Bond Index to the Lehman Baa Corporate Bond Index, which more accurately
reflects the fund's investment program explained below. Returns for both
indexes are shown in the table; beginning with the next report, we will
show returns for only the new index.
Performance Comparison
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Periods Ended 5/31/99 6 Months 12 Months
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Corporate Income Fund 0.53% - 1.21%
Lehman Baa Corporate
Bond Index - 0.44 2.89
Lipper Corporate Debt
BBB Funds Average - 0.90 2.09
Lehman Aggregate
Bond Index - 0.76 4.35
The fund's program focuses on higher-risk areas of the corporate bond market to
achieve attractive income and long-term returns. However, this makes the fund
vulnerable to volatility during periods of severe market disruption. During the
six months ended May 31, 1999, your fund posted a positive return and
outperformed both Lehman indexes and the average for our Lipper peer group. The
12-month period told a different story, with the fund lagging all three
benchmarks. Total return for the past six months reflected a decline in the
share price from $9.84 last November to $9.54 at the end of May, which was more
than offset by dividend income of $0.33 per share for a positive return. Over 12
months, the share price declined $0.85 per share, while dividend income and a
small capital gain amounted to $0.72, resulting in a negative total return.
The fund's lagging return for the fiscal year can be attributed in part to
holdings that were hit particularly hard by global market turmoil last year:
split-rated bonds within the investment grade sector, high-yield securities, and
Yankee bonds from Latin American and Asian issuers. As mentioned in our last
report, when prices for these securities began to improve in late 1998, we took
the opportunity to selectively reposition portions of the portfolio. We replaced
some financial services and Yankee bonds with more defensive investment-grade
securities in anticipation of expected slowing in global economic growth and a
stable-to-lower interest rate environment. We also purchased some high-yield
securities. Our move to a more defensive posture introduced greater sensitivity
to interest rates as higher-quality bonds tend to trade more in line with price
changes of U.S. Treasury securities. The sharp rise in interest rates in the
first half of 1999 and accompanying price declines among high-grade corporate
bonds had a negative impact on the net asset value of the fund in the second
half of the period.
Quality Diversification
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A Rated BBB Rated BB Rated B Rated Other
24 51 16 9 0
Conversely, the outlook for an economic recovery overseas had a positive effect
on our lower-quality securities. In addition, firming in key commodity markets
such as oil, and some merger and acquisition activity in the energy sector,
helped our Latin American Yankee bond positions. The fund's holdings in YPF
(target of a takeover bid by a Spanish company) and Banco Santiago, the largest
banking franchise in Chile, reacted favorably.
OUTLOOK
In the U.S., the manufacturing sector shows signs of emerging from its recent
downturn, and demand remains strong. We expect the economy to slow during the
next six to 12 months, although robust consumer demand will likely keep GDP
growth above 3.0%. Despite the 0.7% jump in the April consumer price index, we
do not anticipate a serious acceleration in the rate of inflation. On the
international front, markets are more liquid, the emerging market crisis seems
contained, and global economies appear to be improving-although growth generally
remains sluggish or worse in cases such as Japan and Russia.
Looking ahead to the second half of the year, we believe corporate bonds could
encounter a period of higher volatility resulting in some reduction in liquidity
and slightly higher risk premiums. One short-term factor weighing on credit
markets is uncertainty about possible Fed action on interest rates-and we would
not be surprised to see a rate increase in late June. However, we do not
anticipate the degree of volatility or lack of liquidity experienced in the
credit markets last year. Barring another round of turmoil in global financial
markets, the yield advantage offered by corporate bonds over Treasuries should
provide investors with attractive returns going forward.
Thank you for investing with T. Rowe Price.
Respectfully submitted,
Robert M. Rubino
Chairman of the Investment Advisory Committee
June 18, 1999
Portfolio Highlights
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KEY STATISTICS
11/30/98 5/31/99
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Price Per Share $ 9.84 $ 9.54
Dividends Per Share
For 6 months 0.37 0.33
For 12 months 0.74 0.70
Dividend Yield *
For 6 months 7.48% 6.97%
For 12 months 7.53 7.36
30-Day Standardized Yield 7.76 7.40
Weighted Average Maturity (years) 15.3 14.4
Weighted Average Effective Duration (years) 6.9 6.2
Weighted Average Quality ** BBB+ BBB+
* Dividends earned and reinvested for the periods indicated are annualized
and divided by the fund's net asset value per share at the end of the
period.
** Based on T. Rowe Price research.
T. Rowe Price Corporate Income Fund
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Portfolio Highlights
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SECTOR DIVERSIFICATION
Percent of Percent of
Net Assets Net Assets
11/30/98 5/31/99
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Banking 14% 14%
Telecommunications 3 8
Savings and Loan 4 8
Petroleum -- 7
Media and Communications 4 6
Insurance 4 6
Electric Utilities 4 5
Container 4 5
Aerospace and Defense 3 3
U.S. Treasury Obligations 4 3
All Other 54 34
Other Assets Less Liabilities 2 1
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Total 100% 100%
T. Rowe Price Corporate Income Fund
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Performance Comparison
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This chart shows the value of a hypothetical $10,000 investment in the fund
over the past 10 fiscal year periods or since inception (for funds lacking
10-year records). The result is compared with a broad-based average or
index. The index return does not reflect expenses, which have been deducted
from the fund's return.
CORPORATE INCOME FUND
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As of 5/31/99
Lehman Baa Lipper Corporate Corporate
Corporate Debt BBB Funds Income
Bond Index $12,702 Average $12,491 Fund $12,435
10/31/95 10000 10000 10000
5/96 10050 10033 10009
5/97 11024 10867 11045
5/98 12291 12053 12587
5/99 12491 12578 12435
Average Annual Compound Total Return
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This table shows how the fund would have performed each year if its actual
(or cumulative) returns for the periods shown had been earned at a constant
rate.
Since Inception
Periods Ended 5/31/99 1 Year 3 Years Inception Date
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Corporate Income Fund - 1.21% 7.50% 6.27% 10/31/95
Investment return and principal value represent past performance and will vary.
Shares may be worth more or less at redemption than at original purchase.
T. Rowe Price Corporate Income Fund
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Financial Highlights For a share outstanding throughout each period
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Year 10/31/95
Ended Through
5/31/99 5/31/98 5/31/97 5/31/96
NET ASSET VALUE
Beginning of period $ 10.39 $ 9.81 $ 9.58 $ 10.00
Investment activities
Net investment income 0.70* 0.75* 0.73* 0.44*
Net realized and
unrealized gain (loss) (0.83) 0.59 0.23 (0.42)
Total from
investment activities (0.13) 1.34 0.96 0.02
Distributions
Net investment income (0.70) (0.76) (0.73) (0.44)
Net realized gain (0.02) -- -- --
Total distributions (0.72) (0.76) (0.73) (0.44)
NET ASSET VALUE
End of period $ 9.54 $ 10.39 $ 9.81 $ 9.58
Ratios/Supplemental Data
Total return(*) (1.21%)* 13.96%* 10.35%* 0.09%*
Ratio of total expenses to
average net assets 0.80%* 0.80%* 0.80%* 0.80%*!
Ratio of net investment
income to average
net assets 7.12%* 7.33%* 7.55%* 7.56%*!
Portfolio turnover rate 140.8% 146.0% 119.5% 70.5%!
Net assets, end of period
(in thousands) $ 50,822 $ 42,829 $ 20,732 $ 12,461
(*) Total return reflects the rate that an investor would have earned on an
investment in the fund during each period, assuming reinvestment of all
distributions.
* Excludes expenses in excess of a 0.80% voluntary expense limitation in
effect through 5/31/99.
! Annualized
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Corporate Income Fund
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May 31, 1999
Statement of Net Assets
Par/Shares Value
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In thousands
CORPORATE BONDS AND NOTES 90.8%
Aerospace & Defense 2.7%
Newport News Shipbuilding, Sr. Notes,
8.625%, 12/1/06 $ 400 $ 416
Raytheon, 5.70%, 11/1/03 1,000 971
1,387
Automobiles and Related 1.9%
Federal-Mogul, 7.875%, 7/1/10 1,000 957
957
Banking 14.6%
Banco Generale, Sr. Sub. Notes,
(144a), 7.70%, 8/1/02 1,500 1,402
Banco Santiago, Sub. Notes, 7.00%, 7/18/07 1,475 1,310
Bank United, 10.25%, 12/31/26 700 686
Capital One Financial, 7.25%, 12/1/03 1,000 981
Imperial Bank, Sub. Notes, 8.50%, 4/1/09 725 703
MBNA America, Sub. Notes, (144a)
6.65%, 7/17/06 500 497
6.75%, 3/15/08 900 873
Natexis, (144a), 8.44%, 12/29/49 1,000 982
7,434
Beverages 3.5%
Panamerican Beverages, Sr. Notes,
(144a), 7.25%, 7/1/09 600 501
501
Broadcasting 0.4%
Chancellor Media
Sr. Notes, (144a), 8.00%, 11/1/08 125 124
Sr. Sub. Notes, 8.125%, 12/15/07 125 122
246
Building Products 0.4%
Building Materials Corporation of America, Sr. Notes
8.625%, 12/15/06 200 197
197
Building and Real Estate 2.3%
Regency Centers, 7.40%, 4/1/04 500 492
Rouse, 8.00%, 4/30/09 700 691
1,183
Cable Operators 2.2%
CSC Holdings, Sr. Notes, 7.875%, 12/15/07 $ 200 $ 205
Fundy Cable, Sr. Secured 2nd Priority Notes,
11.00%, 11/15/05 150 164
Lenfest Communications, Sr. Sub. Notes,
10.50%, 6/15/06 250 295
Northland Cable Television, Sr. Sub. Notes,
10.25%, 11/15/07 250 264
Rogers Cablesystems, Sr. Sub. Deb.,
11.00%, 12/1/15 150 175
1,103
Consumer Nondurables 0.8%
American Safety Razor, Sr. Notes, 9.875%, 8/1/05 150 152
Herff Jones, Sr. Sub. Notes, 11.00%, 8/15/05 250 269
421
Consumer Products 1.0%
Doane Pet Care, Sr. Sub. Notes, 9.75%, 5/15/07 250 256
Holmes Products, Gtd. Notes, 9.875%, 11/15/07 200 197
Purina Mills, Sr. Sub. Notes, 9.00%, 3/15/10 50 40
493
Container 4.7%
Ball, Sr. Notes, 7.75%, 8/1/06 300 299
Owens Illinois, Sr. Deb., 7.80%, 5/15/18 2,000 1,899
Plastic Containers, Sr. Secured Notes,
10.00%, 12/15/06 150 170
2,368
Drugs 1.9%
Merck, 6.40%, 3/1/28 1,000 950
950
Electric Utilities 5.2%
Alabama Power, Sr. Notes, 5.35%, 11/15/03 2,000 1,925
Niagara Mohawk, Sr. Notes, 7.75%, 10/1/08 250 258
South Carolina Electric & Gas, 1st Mtg. Bonds,
6.125%, 3/1/09 490 472
2,655
Energy 1.2%
Amerigas Partners, Sr. Notes, 10.125%, 4/15/07 200 207
Energy Corporation of America, Sr. Sub. Notes
9.50%, 5/15/07 100 93
Offshore Logistics, Sr. Notes, 7.875%, 1/15/08 100 97
Pride Petroleum Services, Sr. Notes, 9.375%, 5/1/07 200 197
594
Entertainment and Leisure 0.2%
Six Flags Theme Parks, Sr. Sub. Disc. Notes,
12.25%, 6/15/05 100 112
112
Food/Tobacco 1.4%
Aurora Foods, Sr. Sub. Notes, 9.875%, 2/15/07 $ 100 $ 105
Keebler, Sr. Sub. Notes, 10.75%, 7/1/06 250 276
Mrs. Fields, Gtd. Sr. Sub. Notes, 10.125%, 12/1/04 50 47
Smithfield Foods, Sr. Sub. Notes, 7.625%, 2/15/08 300 277
705
Foreign Government 0.5%
Federated Republic of Brazil, 11.625%, 4/15/04 300 274
274
Gaming 1.4%
Harrahs Operating, Gtd. Sr. Sub. Notes,
7.875%, 12/15/05 250 245
Mohegan Tribal Gaming, Sr. Notes, (144a),
8.125%, 1/1/06 250 247
Park Place Entertainment, Sr. Sub. Notes,
7.875%, 12/15/05 250 240
732
Health Care 2.0%
Beckman Instruments, Sr. Notes, (144a),
7.45%, 3/4/08 1,070 1,032
1,032
Health Care Services 0.4%
Tenet Healthcare, Sr. Notes, 8.00%, 1/15/05 200 196
196
Insurance 6.1%
Fairfax Financial, 8.25%, 10/1/15 1,000 1,001
Zurich Capital Trust, (144a), 8.376%, 6/1/37 2,000 2,081
3,082
Investment Dealers 1.9%
Paine Webber, 6.45%, 12/1/03 1,000 986
986
Lodging 0.4%
Courtyard by Marriott II, Sr. Secured Notes,
10.75%, 2/1/08 50 51
Red Roof Inns, Sr. Notes, 9.625%, 12/15/03 150 152
203
Media and Communications 6.3%
News America, (144a), 6.75%, 1/9/38 2,000 1,938
Seagrams, Sr. Notes, 6.80%, 12/15/08 1,300 1,272
3,210
Metals and Mining 0.6%
P&L Coal, Sr. Notes, 8.875%, 5/15/08 300 302
302
Paper and Paper Products 1.9%
Abitibi Consolidated, 6.95%, 4/1/08 $ 500 $ 485
Packaging Corporation of America,
Sr. Sub. Notes, (144a) 9.625%, 4/1/09 250 254
Repap New Brunswick
Sr. Secured 1st Priority Notes
9.00%, 6/1/04 25 24
(144a), 11.50%, 6/1/04 200 202
965
Petroleum 6.7%
PDVSA Finance, 7.50%, 11/15/28 1,200 907
YPF Sociedad Anonima, 10.00%, 11/2/28 2,200 2,480
3,387
Printing and Publishing 0.5%
Hollinger International Publishing,
Gtd. Notes, 9.25%, 3/15/07 250 259
259
Retail 0.2%
Safelite Glass, Sr. Sub. Notes, 9.875%, 12/15/06 100 93
93
Savings and Loan 7.6%
Bank United, 8.875%, 5/1/07 750 748
Dime Bancorp, Sr. Notes, 6.375%, 1/30/01 1,000 988
Golden State Holdings, Sr. Notes, 7.125%, 8/1/05 2,000 1,946
ML Capital Trust, Gtd. Notes, 9.875%, 3/1/27 150 168
3,850
Service 1.0%
Coinmach, Sr. Sub. Notes, 11.75%, 11/15/05 250 275
Host Marriott Travel, Sr. Notes, 9 50%, 5/15/05 150 156
Intertek Finance, Sr. Sub. Notes, 10.25%, 11/1/06 75 73
504
Specialty Chemicals 1.4%
American Pacific, Sr. Notes, 9.25%, 3/1/05 250 258
ISP Holdings, Sr. Notes, 9.75%, 2/15/02 200 204
Octel, Sr. Notes, 10.00%, 5/1/06 250 256
718
Telecommunications 7.7%
AT&T, 6.50%, 3/15/29 1,200 1,113
Intermedia Communications, Sr. Notes, (144a),
9.50%, 3/1/09 250 245
Mastec, Sr. Sub. Notes, 7.75%, 2/1/08 $ 250 $ 240
MCI Worldcom, Sr. Notes, 6.25%, 8/15/03 1,000 989
Nextel Communications, Sr. Disc. Notes
STEP, 0%, 2/15/08 250 168
Nextlink Communications, Sr. Disc. Notes
STEP, 0%, 6/1/09 350 193
PSINet, Sr. Notes, (144a), 10.00%, 2/15/05 300 302
Qwest Communications, Sr. Notes, 7 50%, 11/1/08 400 400
Rogers Cantel, Sr. Secured Deb., 9 375%, 6/1/08 250 263
3,913
Textiles and Apparel 0.8%
Westpoint Stevens, Sr. Notes, 7.875%, 6/15/08 400 396
396
Transportation (excluding Rail Road) 1.5%
Allied Holdings, Gtd. Sr. Sub. Notes,
8.625%, 10/1/07 250 238
Stena, Sr. Notes, 10.50%, 12/15/05 250 248
TravelCenters of America, Sr. Sub. Notes,
10.25%, 4/1/07 250 255
741
Total Corporate Bonds and Notes (Cost $47,110) 46,149
ASSET-BACKED SECURITIES 2.0%
Airlines 2.0%
Atlas Air, ETC, 8.77%, 1/2/11 1,000 996
Total Asset-Backed Securities (Cost $1,000) 996
EQUITY AND CONVERTIBLE SECURITIES 0.7%
Building and Real Estate 0.7%
Crescent Real Estate Equities, Cv. Pfd.,
(Series A), 6.75% 7 119
Equity Residential Properties Trust, REIT 3 65
Reckson Associates Realty, REIT, Cv. Pfd.,
(Series A), 7.625% 7 170
Total Equity and Convertible Securities (Cost $344) 354
U.S. GOVERNMENT OBLIGATIONS 2.7%
U.S. Treasury Obligations 2.7%
U.S. Treasury Bonds, 5.25%, 2/15/29 $ 1,500 $ 1,377
Total U.S. Government Obligations (Cost $1,415) 1,377
Money Market Funds 3.1%
Reserve Investment Fund, 4.96% # 1,567 1,567
Total Money Market Funds (Cost $1,567) 1,567
Total Investments in Securities
99.3% of Net Assets (Cost $51,436) $50,443
Other Assets Less Liabilities 379
NET ASSETS $50,822
----------
Net Assets Consist of:
Accumulated net investment income
- net of distributions $60
Accumulated net realized gain/loss
- net of distributions (2,123)
Net unrealized gain (loss) (993)
Paid-in-capital applicable to 5,328,708
shares of $0.0001 par value capital stock
outstanding; 1,000,000,000 shares authorized 53,878
NET ASSETS $50,822
----------
NET ASSET VALUE PER SHARE $9.54
----------
# Seven-day yield
ETC Equipment Trust Certificate
REIT Real Estate Investment Trust
STEP Stepped coupon note for which the interest rate will adjust on
specified future date(s).
144a Security was purchased pursuant to Rule 144a under the Securities
Act of 1933 and may not be resold subject to that rule except to
qualified institutional buyers-total of such securities at period-end
amounts to 21.0% of net assets.
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Corporate Income Fund
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Statement of Operations
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In thousands
Year
Ended
5/31/99
Investment Income
Interest income $ 4,070
Expenses
Shareholder servicing 127
Custody and accounting 101
Investment management 71
Registration 38
Organization 26
Prospectus and shareholder reports 23
Legal and audit 14
Directors 6
Proxy and annual meeting 3
Miscellaneous 2
Total expenses 411
Expenses paid indirectly (3)
Net expenses 408
Net investment income 3,662
Realized and Unrealized Gain (Loss)
Net realized gain (loss)
Securities (2,855)
Futures (26)
Net realized gain (loss) (2,881)
Change in net unrealized gain or loss on securities (1,191)
Net realized and unrealized gain (loss) (4,072)
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ (410)
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The accompanying notes are an integral part of these financial statements.
T. Rowe Price Corporate Income Fund
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Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
In thousands
Year
Ended
5/31/99 5/31/98
Increase (Decrease) in Net Assets
Operations
Net investment income $ 3,662 $ 2,298
Net realized gain (loss) (2,881) 1,045
Change in net unrealized gain or loss (1,191) 325
Increase (decrease) in net assets
from operations (410) 3,668
Distributions to shareholders
Net investment income (3,654) (2,301)
Net realized gain (110) --
Decrease in net assets from distributions (3,764) (2,301)
Capital share transactions*
Shares sold 44,593 32,456
Distributions reinvested 2,468 1,448
Shares redeemed (34,894) (13,174)
Increase (decrease) in net assets from capital
share transactions 12,167 20,730
Net Assets
Increase (decrease) during period 7,993 22,097
Beginning of period 42,829 20,732
End of period $ 50,822 $ 42,829
*Share information
Shares sold 4,525 3,146
Distributions reinvested 252 141
Shares redeemed (3,570) (1,277)
Increase (decrease) in shares outstanding 1,207 2,010
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Corporate Income Fund
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May 31, 1999
Notes to Financial Statements
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NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
T. Rowe Price Corporate Income Fund, Inc. (the fund) is registered under
the Investment Company Act of 1940 as a diversified, open-end management
investment company and commenced operations on October 31, 1995.
The accompanying financial statements are prepared in accordance with
generally accepted accounting principles for the investment company
industry; these principles may require the use of estimates by fund
management.
Valuation Debt securities are generally traded in the over-the-counter
market. Investments in securities with original maturities of one year or
more are stated at fair value as furnished by dealers who make markets in
such securities or by an independent pricing service, which considers yield
or price of bonds of comparable quality, coupon, maturity, and type, as
well as prices quoted by dealers who make markets in such securities.
Securities with original maturities of less than one year are stated at
fair value, which is determined by using a matrix system that establishes a
value for each security based on money market yields.
Equity securities listed or regularly traded on a securities exchange are
valued at the last quoted sales price on the day the valuations are made. A
security which is listed or traded on more than one exchange is valued at
the quotation on the exchange determined to be the primary market for such
security. Listed securities not traded on a particular day and securities
regularly traded in the over-the-counter market are valued at the mean of
the latest bid and asked prices. Other equity securities are valued at a
price within the limits of the latest bid and asked prices deemed by the
Board of Directors, or by persons delegated by the Board, best to reflect
fair value.
Investments in mutual funds are valued at the closing net asset value per
share of the mutual fund on the day of valuation.
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at fair
value as determined in good faith by or under the supervision of the
officers of the fund, as authorized by the Board of Directors.
Premiums and Discounts Premiums and discounts on debt securities are
amortized for both financial reporting and tax purposes.
Other Income and expenses are recorded on the accrual basis. Investment
transactions are accounted for on the trade date. Realized gains and losses
are reported on the identified cost basis. Dividend income and
distributions to shareholders are recorded by the fund on the ex-dividend
date. Income and capital gain distributions are determined in accordance
with federal income tax regulations and may differ from those determined in
accordance with generally accepted accounting principles. Expenses paid
indirectly reflect credits earned on daily, uninvested cash balances at the
custodian, used to reduce the fund's custody charges.
NOTE 2 - INVESTMENT TRANSACTIONS
Consistent with its investment objective, the fund engages in the following
practices to manage exposure to certain risks or enhance performance. The
investment objective, policies, program, and risk factors of the fund are
described more fully in the fund's prospectus and Statement of Additional
Information.
Noninvestment-Grade Debt Securities At May 31, 1999, the fund held
investments in noninvestment-grade debt securities, commonly referred to as
"high-yield" or "junk" bonds. A real or perceived economic downturn or
higher interest rates could adversely affect the liquidity or value, or
both, of such securities because such events could lessen the ability of
issuers to make principal and interest payments.
Other Purchases and sales of portfolio securities, other than
short-term and U.S. government securities, aggregated $63,918,000 and
$55,604,000, respectively, for the year ended May 31, 1999. Purchases and
sales of U.S. government securities aggregated $16,424,000 and $13,650,000,
respectively, for the year ended May 31, 1999.
NOTE 3 - FEDERAL INCOME TAXES
No provision for federal income taxes is required since the fund intends to
continue to qualify as a regulated investment company and distribute all of
its taxable income. As of May 31, 1999, the fund has capital loss
carryforwards for federal income tax purposes of $815,000, all of which
expires in 2007. The fund intends to retain gains realized in future
periods that may be offset by available capital loss carryforwards.
In order for the fund's capital accounts and distributions to shareholders
to reflect the tax character of certain transactions, the following
reclassifications were made during the year ended May 31, 1999. The results
of operations and net assets were not affected by the increases/(decreases)
to these accounts.
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Undistributed net investment income $24,000
Paid-in-capital (24,000)
At May 31, 1999, the cost of investments for federal income tax purposes
was substantially the same as for financial reporting and totaled
$51,436,000. Net unrealized loss aggregated $993,000 at period-end, of
which $407,000 related to appreciated investments and $1,400,000 to
depreciated investments.
NOTE 4 - RELATED PARTY TRANSACTIONS
The investment management agreement between the fund and T. Rowe Price
Associates, Inc. (the manager) provides for an annual investment management
fee, of which $4,000 was payable at May 31, 1999. The fee is computed daily
and paid monthly, and consists of an individual fund fee equal to 0.15% of
average daily net assets and a group fee. The group fee is based on the
combined assets of certain mutual funds sponsored by the manager or Rowe
Price-Fleming International, Inc. (the group). The group fee rate ranges
from 0.48% for the first $1 billion of assets to 0.30% for assets in excess
of $80 billion. At May 31, 1999, and for the year then ended, the effective
annual group fee rate was 0.32%. The fund pays a pro-rata share of the
group fee based on the ratio of its net assets to those of the group.
Under the terms of the investment management agreement, the manager is
required to bear any expenses through May 31, 1999, which would cause the
fund's ratio of total expenses to average net assets to exceed 0.80%.
Thereafter, through May 31, 2001, the fund is required to reimburse the
manager for these expenses, provided that average net assets have grown or
expenses have declined sufficiently to allow reimbursement without causing
the fund's ratio of total expenses to average net assets to exceed 0.80%.
Pursuant to this agreement, $171,000 of management fees were not accrued by
the fund for the year ended May 31, 1999 and $149,000 of fees and expenses
from prior periods remain subject to reimbursement.
In addition, the fund has entered into agreements with the manager and two
wholly owned subsidiaries of the manager, pursuant to which the fund
receives certain other services. The manager computes the daily share price
and maintains the financial records of the fund. T. Rowe Price Services,
Inc. is the fund's transfer and dividend disbursing agent and provides
shareholder and administrative services to the fund. T. Rowe Price
Retirement Plan Services, Inc. provides subaccounting and recordkeeping
services for certain retirement accounts invested in the fund. The fund
incurred expenses pursuant to these related party agreements totaling
approximately $175,000 for the year ended May 31, 1999, of which $18,000
was payable at period-end.
The fund may invest in the Reserve Investment Fund and Government Reserve
Investment Fund (collectively, the Reserve Funds), open-end management
investment companies managed by T. Rowe Price Associates, Inc. The Reserve
Funds are offered as cash management options only to mutual funds and other
accounts managed by T. Rowe Price and its affiliates and are not available
to the public. The Reserve Funds pay no investment management fees.
Distributions from the Reserve Funds to the fund for the year ended May 31,
1999, totaled $66,000 and are reflected as interest income in the
accompanying Statement of Operations.
Tax Information (Unaudited) for the Tax Year Ended 5/31/99
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We are providing this information as required by the Internal Revenue Code. The
amounts shown may differ from those elsewhere in this report because of
differences between tax and financial reporting requirements.
The fund's distributions to shareholders included $110,000 from short-term
capital gains.
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T. Rowe Price Corporate Income Fund
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Report of Independent Accountants
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To the Board of Directors and Shareholders of T.Rowe Price Corporate
Income Fund, Inc.
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position
of T. Rowe Price Corporate Income Fund, Inc. (the "Fund") at May 31, 1999,
and the results of its operations, the changes in its net assets and the
financial highlights for each of the fiscal periods presented, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which
included confirmation of securities at May 31, 1999 by correspondence with
the custodian, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Baltimore, Maryland
June 17, 1999
For yield, price, last transaction,
current balance, or to conduct
transactions, 24 hours, 7 days
a week, call Tele*Access(registered trademark):
1-800-638-2587 toll free
For assistance
with your existing
fund account, call:
Shareholder Service Center
1-800-225-5132 toll free
410-625-6500 Baltimore area
To open a brokerage account
or obtain information, call:
1-800-638-5660 toll free
Internet address:
www.troweprice.com
T. Rowe Price Associates
100 East Pratt Street
Baltimore, Maryland 21202
This report is authorized for
distribution only to shareholders
and to others who have received
a copy of the prospectus appropriate
to the fund or funds covered in this
report.
Investor Centers:
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006
4200 West Cypress St.
10th Floor
Tampa, FL 33607
4410 ArrowsWest Drive
Colorado Springs, CO 80907
Warner Center Plaza 5
Mezzanine Level
21800 Oxnard Street, Suite 270
Woodland Hills, CA 91367
Invest With Confidence(registered trademark)
T. Rowe Price Investment Services, Inc., Distributor. F03-050 5/31/99